Southwest Airlines expects slim 1Q2011 profit

Southwest Airlines is expected to report a slim 1Q2011 profit earnings before the market opens on 21-Apr-2011 (AP, 19-Apr-2011). While traffic has been high on Southwest, the carrier has been hit by rising jet fuel prices which CEO Gary Kelly states could increase the company’s costs by USD1 billion. Southwest has also been dealing with bad publicity after one of its older jets sprung a 5ft hole in its roof. During 1Q2011, Southwest shares fell 2.7% which is slightly less than UnitedContinental and much less than Delta Air Lines and American Airlines.

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Alaska Air Group remains in limbo as it waits for the US Department of Justice (DoJ) to complete a review of the proposed Alaska-Virgin America merger. Alaska had originally hoped to gain government approval and close the deal in early 4Q2016, but the regulatory review unsurprisingly is taking longer than expected. However, Alaska remains confident of finalising the arrangement before the end of 2016, and is taking the proper financial steps to finance its acquisition of Virgin America.

In the short term Alaska is experiencing slightly improving trends in the US marketplace, and its unit revenue improved on a sequential basis from 2Q2016 to 3Q2016. Another positive development for Alaska is a slowing of competitive capacity growth in its markets in 4Q2016 and in early 2017. The tempering of growth is reflective of most US airlines planning to lower capacity expansion in 2017 as higher oil prices heighten the importance of returning to positive unit revenue.

Alaska also plans slower capacity growth of 7% in 2017, versus 8.5% in 2016. Approximately 3ppt of the increase is driven by longer stage lengths and the annualisation of nearly 10 new routes launched in 2016 – a mix of smaller and larger markets with varying levels of competition.

Southwest Airlines believes it can potentially achieve a positive unit revenue result in early 2017, but its sequential trends from 3Q2016 to 4Q2016 are not improving at the rate of the three large US global network airlines. In fact, if Southwest hits the upper end of its unit revenue guidance for the last three months of 2016, the company’s performance could worsen on a sequential basis.

Many factors are driving Southwest’s unit revenue pressure at the end of 2016, including the effects of a credit card agreement that lifted its unit revenues in 2015 and 2016, competitive capacity additions in its markets and a still-soft, but improving domestic pricing environment. In order to regain positive unit revenue Southwest’s planned capacity growth is decreasing year-on-year for 2017. Additionally, the airline is scrutinising its network in order to determine which routes can generate maximum revenue production.

Southwest is also bracing for cost inflation in 4Q2016 driven by tentative collective bargaining agreements recently reached with pilots and flight attendants in 3Q2016. The cost increases from those agreements – if they are ratified – will continue into 2107, putting extra pressure on Southwest to deliver on its unit revenue targets.